BORROMEO V.

CA 550 SCRA 269

1311-1314 – Relativity of Contracts

FACTS: Spouses Nestor and Nona Borromeo were client-depositors of Equitable PCI Bank (EPCIB) for more than 12 years. Sps. Borromeo
alleged that sometime in mid-1999, the branch manager of EPCIB, J.P. Rizal Branch, offered a loan to the petitioners under its Own-a-Home
Loan Program. Sps. Borromeo applied for a loan of P4,000,000.00 and were informed of the approval of their loan application sometime in
October 1999. It was in the early part of 2000 that Sps. Borromeo signed blank loan documents consisting of the Loan Agreement,
Promissory Notes, a Real Estate Mortgage (REM) and Disclosure Statements.

To secure the payment of the loan, Sps. Borromeo executed real estate mortage over their land and the proposed house that was to be built
thereon. Sps. Borromeo asserted that even if the loan documents were signed in blank, it was understood that they executed the real estate
mortgage in favor of EPCIB.

From April 2001 to September 2002, respondent bank released a total amount of P3,600,000.00 in four installments, while the balance of
P400,000.00 was not drawn by the Sps. Borromeo. On the other hand, Sps. Borromeo started to pay their monthly amortizations on 21 April
2001.

Sps. Borromeo made repeated verbal requests to EPCIB to furnish them their copies of the loan documents. On 6 August 2003, they sent the
president of EPCIB a letter, which reiterated their request for copies of the loan documents. In addition, petitioners stated that the interest rate
of 14% to 17% that was charged against them was more than the interest rate of 11% or 11.5% that the parties agreed upon.

They further claimed that they purposely did not draw the remaining balance of the loan in the amount of P400,000.00 and stopped paying their
loan amortizations to protest EPCIBs continued failure to provide them copies of the loan documents and its imposition of an interest rate
higher than that agreed upon. From the time petitioners began paying their monthly amortizations on 21 April 2001 until the time they stopped,
petitioners made total payments of approximately P500,000.00.

Finally, on 3 October 2003, Sps. Borromeo received copies of the loan documents which they had earlier signed in blank. According to
petitioners, they were surprised to find out that the Loan Agreement and REM designated respondent Equitable Savings Bank (ESB) as
lender and mortgagor, instead of EPCIB with whom they allegedly entered into the agreement. However, in contrast to the Loan
Agreement and the REM, the four Promissory Notes designated EPCIB as the lender.
When the Sps. Borromeo failed to pay for the loan in full by 30 September 2003, ESB sought to extra-judicially foreclose the real estate
mortgage. Sps. Borromeo argued that the agreement was between the petitioners and EPCIB and, consequently, ESB had no interest in the
real estate mortgage.

ISSUE: WON Equitable Savings Bank (ESB) has the right to foreclose the subject property.

RULING: In this case, petitioner’s rights to their property is restricted by the real estate mortgage they executed over it. Upon their default on
the mortgage debt, the right to foreclose the property would be vested upon the creditor- mortgagee. Nevertheless, the right of foreclosure
cannot be exercised against the petitioners by any person other than the creditor-mortgagee or its assigns.

According to the pertinent provisions of the Civil Code:

ART. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the rights
and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law.
The heir is not liable beyond the value of the property he received from the decedent.

If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he
communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is
not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person.

An extrajudicial foreclosure instituted by a third party to the Loan Agreement and the REM would, therefore, be a violation of petitioner’s
rights over their property.

It is clear that under Article 1311 of the Civil Code, contracts take effect only between the parties who execute them. Where there is no
privity of contract, there is likewise no obligation or liability to speak about. The civil law principle of relativity of contracts provides that
contracts can only bind the parties who entered into it, and it cannot favor or prejudice a third person, even if he is aware of such contract and
has acted with knowledge thereof. Since a contract may be violated only by the parties thereto as against each other, a party who has not taken
part in it cannot sue for performance, unless he shows that he has a real interest affected thereby.

In the instant case, Sps. Borromeo assert that their creditor-mortgagee is EPCIB and not respondent ESB. While ESB claims that
petitioners have had transactions with it, particularly the five check payments made in the name of ESB, it fails to categorically state that ESB
and not EPCIB is the real creditor- mortgagor in this loan and mortgage transaction. The four Promissory Notes designate EPCIB as
the lender. In a letter, addressed to Home Guaranty Corporation, EPCIB Vice President Gary Vargas even specified petitioners’ loan as one
of its housing loans for which it sought insurance coverage. Records also show that petitioners repeatedly dealt with EPCIB.
When the petitioners complained of not receiving the loan documents and the allegedly excessive interest charges, they addressed their letter
dated to the president of EPCIB. The response, which explained the loan transactions in detail in a letter, was written by Gary Vargas, EPCIB
Vice President. Of almost three years amortizations, the checks were issued by Sps. Borromeo in the name of EPCIB,
except only for five checks which were issued in respondent’s (ESB) name.
ESB, although a wholly-owned subsidiary of EPCIB, has an independent and separate juridical personality from its parent company. If used
to perform legitimate functions, a subsidiary’s separate existence shall be respected, and the liability of the parent corporation, as well as the
subsidiary, shall be confined to those arising from their respective businesses.

From a perusal of the records, petitioners did not enter into a Loan Agreement and REM with respondent. ESB, therefore, has no right to
foreclose the subject property even after default, since this right can only be claimed by the creditor-mortgagor, EPCIB;
and, consequently, the extrajudicial foreclosure of the REM by respondent would be in violation of petitioners’ property rights.